Government urged to scrap 'unfair' tax raid on older pension savers

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The change will put workers earning more than £40,000 a year at risk of receiving shock tax bills if they spend as little as £1 their pension and then continue to save 10pc of their salaryCredit:
Dominic Lipinski

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Older savers who return to work after dipping into their pensions will see their ability to save hampered by an "unfair" tax raid which the Government is facing pressure to scrap.

From April the Treasury is planning to reduce savings limits for over 55s who have already used the pension freedoms to access their money from £10,000 a year to £4,000.

The change will put workers earning more than £40,000 a year at risk of receiving shock tax bills if they spend as little as £1 their pension and then continue to save 10pc of their salary, calculations show.

Last night experts urged Phillip Hammond to abandon the move which, they warned, would fly in the face of a separate Government push for working age people to care for elderly relatives.

Last month David Mowat, care minister, said Britain's ageing population meant parents needed to be as responsible for the care of their elderly mothers and fathers as their own children.

Tom McPhail, head of pensions policy at Britain's largest pension firm, Hargreaves Lansdown, said: "This will come as a nasty shock to people hoping to take a career break or cut down hours to care for a elderly relative. If they use pension savings to support themselves they face being heavily penalised.

"The Government that has lost sight of the importance of putting individuals first. This will inconvenience and disproportionately penalises millions of ordinary savers and its barely going to save the government any money. It must be scrapped."

Tom Selby, senior analyst at AJ Bell, another pension firm, said: “Given that most people won’t be aware of these plans there is a significant risk large numbers will accidentally overpay into a pension and be hit with an unexpected tax charge.

“The Government needs to accept the current rules are not fit for purpose. It should shelve this unfair cut in pension savings incentives and go back to the drawing board."

Last year the Treasury announced plans to scale back the amount people drawing from their pension are allowed to continue saving over fears that many would abuse the system by claiming tax on it twice.

This tax trick, commonly referred to as "recycling", is a loophole which was created by the pension freedoms, which were introduced in 2015.

HMRC data reveals that since the new flexibilities were introduced over half a million savers have used the pension freedoms, with millions more expected to do so over the coming years.

Under current plans people who have already used the pension freedoms will be able to save up to £4,000 a year and still claim tax relief at their marginal rate. Savings above the limit will not receive tax relief.

The Treasury is currently consulting on the finer details of how the policy will work with the deadline for feedback on February 15.

In the consultation document the Treasury said: "We believe that an allowance of £4,000 is fair and reasonable and should allow people who need to access their pension savings to rebuild them if they subsequently have opportunity to do so.

"Importantly, however, it limits the extent to which pension savings can be recycled to take advantage of tax relief, which is not within the spirit of the pension tax system. The government does not consider that earners aged 55+ should be able to enjoy double pension tax relief i.e. relief on recycled pension savings."